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Colum McKinley, senior portfolio manager, CIBC Asset Management.

So economists are predicting that we’re going to see interest rates move higher over the coming year and this is to combat inflation in the economy. And so how will this impact dividends and what are the sectors that we’re looking at and thinking about in the Canadian context that are providing good opportunities?

Clearly, the interest rate cycle hiking has begun and we have already seen increases from the Federal Reserve in the United States and the Bank of Canada here in Canada. And there is a high expectation that we will see more increases, quite aggressive increases, throughout the remainder of 2022. And as interest rates rise, investors will have another alternative for when they search for income in their portfolios. And so they’ll have dividends that equity investors traditionally experience, but also they’re going to see higher rates on their traditional fixed income securities, like bonds. And we think that high-quality, dividend-paying stocks will continue to look attractive and will continue to provide for income seeking investors. They’re going to provide the income that they need in the form of dividends, plus they’re going to provide long-term capital appreciation. As these businesses grow over time, the capital, the value of the company will increase and potentially their dividends will increase over time as well.

What we look for in a quality dividend payer is a strong company, a business that is in a solid industry with good fundamentals, and that has a management team that has a track record of executing — a strong management team that has proven that they can run the business effectively. And these are the types of businesses that by their very nature they generate excess capital. And when they do that, they can pay dividends today and they can grow those dividends. And I think that’s one of the things that’s quite attractive about equities is you can compound and grow that dividend over time.

I think a great example of that where we see opportunities in the Canadian marketplace is the banks. You know, the banking industry in Canada is one of the best in the world. Management teams have a very, very long track record of executing, delivering strong profitability to the owners of the business. Banks today have significant excess capital on their balance sheets. And so that allows them to do two things. So, first of all, weather any uncertainty or any challenges that we may see in the near term, but also in the future return capital to shareholders in the form of dividends or share buybacks. Dividend yields on the banks today are around three and three-quarters percent on average, and we think that’s likely to continue to grow, as it has in the past, in the mid-single digit range. And so for investors that are looking for that dividend income that can grow and compound over time, we think the banks continue to be a great place for investors’ capital to be allocated.

Another sector where we are seeing the potential for strong capital return is the energy sector. And the energy sector today is benefiting from above-average commodity prices. We have seen that for many years energy stocks have shifted from reinvesting capital into the ground, i.e. growing their production output on a yearly basis and shifting to return that excess capital to shareholders. And so as we have a period like we are having today where oil prices have rallied to record levels, we’re back to some of the highest levels we’ve seen over the last 10 years, that is going to translate into windfall cash flow for Canadian energy companies.

And in our discussions with the leaders of those businesses, they see returning that excess capital to shareholders in the form of dividends or share buybacks as the most likely lever that they’re going to lean on. And so dividends have been growing in the energy sector and we expect to see some special dividends in the coming quarters that will be rewarded to investors.

CIBC Monthly Income Fund
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